Institutional Equities - Online Share Trading

Institutional Equities
Stability in interest rate cycle should lead to gains in stock prices
The government gave a clear indication in the Economic Survey-2011 that in the short-term there will be
higher growth, higher inflation and higher interest rates. To curb rising inflation, RBI raised the repo rate by
350bps between January 2010 & September 2011, which is 75bps lower than the previous peak witnessed in
July 2008. Interest rate is one of the key factors that influence growth in infrastructure investments, especially
from the private sector. Consensus estimate expects the interest rates to go up by another 25bps and then
stabilise at that level (may not correct sharply as in the previous cycle of FY09). Historically, whenever the
interest rates peak, the infrastructure stocks outperform (during FY06, interest rates stabilised and it led to
outperformance of these stocks). Hence, we believe that when the interest rates stabilise, the infrastructure
sector stocks should outperform.
Exhibit 22: Bond yield vs Infrastructure stock prices
320
280
240
200
160
120
80
40
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
Bond yield GMR Infra R-Infra IVRCL IRB Infra HCC
Source: Bloomberg, Company, Nirmal Bang Institutional Equities Research
Exhibit 23: Repo rate trend
(%)
10
9
8
7
6
5
4
3
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11
Source: Reserve Bank of India
11 Infrastructure Sector